/GILTS/STIR/SWAPS: NatWest Colour As Short-Term Repo Usage Hits Record High

BBG headlines note that BoE short-term repo usage hits a record GBP4bn.

• Earlier this week NatWest wrote “the cheapening in repo and the rapid shift from collateral scarcity to collateral abundance have been the two (not mutually exclusive) drivers of swap spreads of late.”
• “We have previously highlighted the “arbitrage” that existed between money market rates: banks can borrow reserves from the BoE at Bank Rate and lend out at RONIA, essentially earning a risk-free return (less any funding charges). But no one seemed to be exploiting this.”
• “For context, the BoE’s short-term repo facility was designed to prevent exactly this kind of spread widening. It is a problem if short-term money market rates are deviating from Bank Rate as it means the level at which the MPC sets monetary policy to have the desired effect on financial conditions is no longer the rate being reflected in markets, and therefore the real economy.”
• “Given the historically low take-up in the short-term repo facility (even in previous episodes of repo cheapening) the BoE may have been concerned about the tools’ effectiveness as a backstop. A sizeable take-up will not only alleviate these concerns but should also limit the extent to which repo can cheapen further and deviate from SONIA.”
• “This in and of itself is probably not enough to prevent swap spreads cheapening, though, given the abundance of supply still to come and some early warning signs of limited demand.”